The Securities and Exchange Board of India (SEBI) recently amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) by notification of: (i) the SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023 (LODR Second Amendment) (effective from 14 July 2023); (ii) the SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations, 2023 (LODR Third Amendment) (effective from 3 August 2023); (iii) the SEBI (Listing Obligations and Disclosure Requirements) (Fourth Amendment) Regulations, 2023 (LODR Fourth Amendment) (effective from 20 September 2023); and (iv) the SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2023 (LODR Fifth Amendment) (effective from 1 October 2023).
The amendments seem to be conscious of the market-price driven nature of the public markets and are essentially aimed at: (a) enhancing and streamlining disclosure requirements for material events / information of a listed entity; and (b) strengthening corporate governance by empowering shareholders and protecting minority shareholders. The amendments introduced by SEBI stem from its discussion paper dated 21 February 2023 and signify SEBI’s commitment to promote transparency, accountability, and investor confidence thereby augmenting public M&A activity in India.
We have highlighted the key changes introduced through the amendment regulations:
New framework for voluntary delisting
A framework has been introduced in the LODR for voluntary delisting of non-convertible debt securities (NCDs) or non-convertible redeemable preference shares and obligations of the listed companies on such delisting.
The listed entity is required to seek an in-principle approval from the stock exchange within 15 working days from the date of passing of the board resolution in this regard. The approval shall be disposed of by the stock exchange within 15 working days from receipt of the application.
The framework also sets out various obligations for the listed entity undertaking the delisting, which include inter alia: (i) issuing a notice and obtaining approval of the holders of such securities; (ii) obtaining approval of the board of directors (Board); (iii) obtaining a no-objection letter from the debenture trustee in case of delisting of NCDs; and (iv) disclosing relevant information in relation to the delisting to the stock exchanges and on the listed entity’s website. The final application for delisting needs to be disposed of by the stock exchange within 15 working days from the date of receipt of such application.
In case of non-receipt of: (a) the in-principle approval from any of the stock exchanges; (b) the requisite approval from the holders of securities; or (c) the no-objection letter from the debenture trustee, the delisting proposal shall be deemed to have failed.
Mandatory listing of NCDs
A new regulation has been introduced through the LODR Fourth Amendment which mandates listing of NCDs. However, the following securities have been exempted from the listing requirement: (i) bonds issued under section 54EC of the Income Tax Act, 1961, (ii) NCDs issued pursuant to an agreement entered into between the listed entity of such securities and multilateral institutions; and (iii) NCDs issued pursuant to an order of any court or Tribunal or regulatory requirement as stipulated by a financial sector regulator namely, SEBI, Reserve Bank of India (RBI), Insurance Regulatory and Development Authority of India or the Pension Fund and Regulatory Development Authority. Securities issued under (ii) and (iii) above shall be locked in and held till maturity by the investors and shall be unencumbered.
Timeline to fill the vacancy of key managerial personnel within 3 months from the date of the vacancy
Any vacancy in the office of Chief Executive Officer (CEO), Chief Financial Officer (CFO), Managing Director (MD), Whole Time Director (WTD), Manager, Compliance Officer (i.e., a qualified company secretary), or any director on the Board of the listed entity will have to be filled within 3 months from the date of the vacancy.
Prior to this amendment, the Companies Act 2013 (Companies Act) required that the vacancy of whole-time key managerial personnel (company secretary, CFO, CEO / MD / WTD / Manager) shall be filled up within 6 months from the date of such vacancy. Since there was no such timeline prescribed under the LODR, this 6-month timeline was applicable to listed entities as well.
Shareholders’ approval required for continuation of term of directors on the Board
From 1 April 2024, the continuation of the term of the directors serving on the Board of a listed entity shall be subject to shareholders’ approval being obtained at least once every 5 years from the date of their appointment or reappointment, as the case may be.
This requirement does not apply to:
- WTD, MD, manager, independent director, or a director retiring as per the provisions of the Companies Act if the shareholders’ approval for their reappointment or continuation is otherwise provided for by the provisions of LODR or Companies Act and has been complied with;
- directors appointed pursuant to the order of a court or a Tribunal;
- nominee director of the Government on the Board of a listed entity (other than a public sector company);
- nominee director of a financial sector regulator on the Board of a listed entity;
- director nominated by a financial institution registered with or regulated by the RBI under a lending arrangement in its normal course of business;
- director nominated by a Debenture Trustee registered with SEBI under a subscription agreement for the debentures issued by the listed entity.
The Companies Act states that, unless the company’s articles of association provide for the retirement of all directors at every annual general meeting, at least 2/3rd of the total number of directors shall be liable to determination by ‘retirement by rotation’ and out of the said 2/3rd, at least 1/3rd of the directors shall retire from the office every year through rotation. Accordingly, not all directors on the Board of a listed company were subject to retirement by rotation. Such directors enjoyed a certain degree of permanency on the Board of the listed company, disregarding the shareholders’ intent on the continuation of such directors on the Board. This is a welcome change in the interest of good corporate governance of public listed entities.
Disclosure related amendments
Introduction of objective / threshold-based criteria for determining materiality of events / information for disclosures required to be made by listed entities to stock exchanges: Listed companies are now required to consider the following criteria for determining the materiality of an event / information to be disclosed:
An event / information, whose value or the expected impact in terms of value exceeds the lower of:
- 2% of the turnover, as per the last audited consolidated financial statements;
- 2% of net worth, as per the last audited consolidated financial statements, except in case the arithmetic value of the net worth is negative; or
- 5% of the average of the absolute value of profit or loss after tax, as per the last three audited consolidated financial statements.
Earlier there were no objective, threshold-based criteria for determining the materiality of an event / information for disclosures to be made by listed entities to the stock exchanges. This determination was entirely subjective and dependent upon the discretion of the Board of the listed company. Listed entities accordingly adopted a generic Materiality Policy, merely reproducing the provisions of the LODR.
Revised timeline for disclosures to stock exchanges: The timeline for disclosure of material events and information to stock exchanges under the LODR has been clarified. The disclosure must be made as soon as reasonably possible and no later than:
- 30 minutes from the closure of the meeting of the Board in which the decision pertaining to the event / information has been taken;
- 12 hours from the occurrence of the event / information, in case the event / information is emanating from within the listed entity; and
- 24 hours from the occurrence of the event / information, in case the event / information is not emanating from within the listed entity.
If the disclosure is made after the above timelines, the listed entity shall provide an explanation for the delay along with the disclosure.
Prior to this amendment, a listed entity was required to disclose to stock exchanges all the material events / information as soon as possible and not later than 24 hours from the occurrence of the event / information. No clear timeline was prescribed based on the nature of the event / information.
Mandatory disclosure of cybersecurity information: A new regulation has been introduced mandating the disclosure of details regarding cybersecurity incidents, breaches, loss of data or documents in the quarterly compliance report. This is aligned with the Indian government’s initiatives towards implementing stricter practices for processing personal data through the Digital Personal Data Protection Act, 2023. Cyber security incidents, breaches, loss of data or documents have an impact on the operations and performance of a listed entity and such disclosures make it easier for investors to make an informed decision about the associated risks and impact of such incidents.
Disclosure of agreements binding the listed entity: All shareholders, promoters, promoter group entities, related parties, directors, key managerial personnel, and employees of a listed entity or of its holding, subsidiary, and associate company, who are parties to the agreements whose purpose and effect is to, impact the management or control of the listed entity, or impose any restriction or create any liability on the listed entity, are required to inform the listed entity about the agreement to which such a listed entity is not a party, within 2 working days of entering into or signing an agreement to enter into such agreements.
Disclosure of fraud, default, and arrests: Listed entities are now obligated to disclose any fraud or defaults by the listed entity or subsidiary and any fraud, default, or arrest of its promoter, director, key managerial personnel, or senior management of the listed entity whether occurred within India or abroad. The newly introduced compliance requirement is in line with the international security law requirements.
Verification of market rumours: Top 100 listed entities and thereafter the top 250 listed entities with effect from the date as specified by SEBI are required to promptly confirm, deny, or clarify any reported event / information in the ‘mainstream media’ which is not general in nature, and which indicates that rumours of an impending specific material event / information are circulating amongst the investing public, within a maximum of 24 hours from the reporting of the event / information. If such rumour / event / information is confirmed, the listed entity must provide its current status.
Further, it is provided in the LODR Second Amendment that in case an event / information is required to be disclosed by the listed entity, pursuant to communication from any regulatory, statutory, enforcement or judicial authority, the listed entity should disclose such communication, along with the event / information, unless the disclosure of such communication is prohibited by the relevant authority.
‘Mainstream media’ has been defined to include print and electronic modes of:
- Newspapers registered with the Registrar of Newspapers for India;
- News channels permitted by the Ministry of Information and Broadcasting;
- Content published by the publisher of news and current affairs content as defined under the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules 2021; and
- Newspapers or news channels or news and current affairs content similarly registered or permitted or regulated, as the case may be, in jurisdictions outside India.
Prior to this amendment, the listed entity could, on its own initiative confirm or deny any reported event / information to stock exchanges.
Impact of the Amendments on Indian Public Markets
The amendments introduced by SEBI to the LODR regulations are expected to have a positive impact on the Indian public markets in the following ways:
- Reduced volatility: The mandatory disclosures on market rumours are expected to reduce volatility in the markets by preventing the spread of misinformation.
- Increased investor confidence: The streamlined disclosure framework and strengthened corporate governance measures are expected to increase investor confidence in the Indian public markets.
- Improved corporate performance: The amendments are also expected to improve corporate performance by holding directors more accountable to shareholders.
In addition to the above, the amendments are also expected to have the following specific impacts on Indian public markets:
- Improved market quality: The amendments are expected to improve market quality by making it easier for investors to access the information they need to make informed investment decisions.
- Increased liquidity: The amendments are also expected to increase liquidity in the markets by making it more attractive for investors to invest in Indian public companies.
- Enhanced investor protection: The amendments are expected to enhance investor protection by reducing the risk of fraud and other malpractices.
While the amendments to the LODR will be an ongoing exercise, the above changes to the LODR contain notable steps towards streamlining disclosure and reporting requirements of listed companies in India, thereby minimizing discrepancy in reporting, and aiding the provision of more accurate and consistent information to the investors. These advances announced by SEBI reflect an attempt at, strengthening corporate governance, restoring investor sentiment, increasing private investment in public enterprises, and promoting operational efficiency and practices at listed companies in India.